Cameron Hepburn


Is this the end of carbon trading, or just a hiccup?


Just as scientists almost universally agree greenhouse gases contribute to the planet’s changing climate, economists almost universally agree the problem is made worse because polluters don’t pay for the mess they make.

A carbon tax is one way to force companies to pay for their pollution. A carbon market is another, established by a “cap and trade” system where a limited number of permits (or “allowances”) are sold or given away each year. Every company must surrender one permit for every tonne of carbon produced. The capped limit is lowered over time to reflect the aim of steadily lowering emissions. The resulting carbon price ensures total emissions do not exceed the limit. Market logic suggests that if permits become more scarce relative to demand, then the cost of the permits, the effective “carbon price”, will rise (and vice versa).